Preliminary Issues and TL v ML on Ownership Disputes in Family Courts

The introduction of Preliminary Issues assists the court in identifying the size of the family pot for division of assets on divorce, but, this procedure should not become a mandatory process. Case management is vital to deal with third parties’ interest as the circumstances see fit.

The Preliminary Issue

In TL v ML DHCJ Mostyn QC (as he then was) referred to Lord Denning’s statement that in ancillary relief proceedings a judge “… can only make an order for transfer to the wife, of property which is the husband’s property. He cannot make an order for the transfer to the wife of someone else’s interest.

(See: Tebbutt v Haynes [1981] 2 All ER 238, per Lord Denning MR:

Lord Denning explained that “…it is within the jurisdiction of the Judge to decide on the validity of the intervenor’s claim. The Judge ought to decide what are the rights and interest of all the parties, not only of the intervenor, but of the husband and wife respectively in the property.”

With the advent of the FDR procedure DHCJ Mostyn QC advocated having such ownership issues determined as a Preliminary Issue to enable an effective FDR to take place. He emphasised that this is not part of the discretionary exercise but a “chancery” ownership issue. DHCJ Mostyn QC did not state the obvious: this was to enhance the settlement process and save costs not to add a new procedure to all cases where there was an “ownership issue”. It was implicit that this was to be a cost proportionate exercise.

DHCJ Mostyn, QC said this as to the task and the procedure that should be followed:

“[37] In my opinion, it is essential in every instance where a dispute arises about the ownership of property in ancillary relief proceedings between a spouse and a third party, that the following things should ordinarily happen: (i) the third party should be joined to the proceedings at the earliest opportunity; (ii) directions should be given for the issue to be fully pleaded by points of claim and points of defence; (iii) separate witness statements should be directed in relation to the dispute; and (iv) the dispute should be directed to be heard separately as a preliminary issue, before the [Financial Dispute Resolution].”

It is said that a dispute with a third party must be approached on exactly the same legal basis as if it were being determined in the Chancery Division.

Mostyn explained in the next paragraph the purpose of the procedure is, “In this way the parties will know at an early stage whether or not the property in question falls within the dispositive powers of the court and a meaningful FDR can take place. It also means that the expensive attendance of the third party for the entire duration of the trial can be avoided. It is a great pity that none of these steps took place in this case. Had they happened, I believe that a great deal of costs would have been saved.”

Indeed, in LWYA v KYW & Anor CACV 151 /2013 [2014] HKEC 2056 the criticism from the Appellant was that there was not even a proper framing of the issue required to be determined as a preliminary issue. The Hon. Kwan JA said “it seems to the court that much of the criticisms made for the appellants as to what case was advanced …, could have been avoided if the parties here had followed the procedure mentioned in TL v ML that is essential for the proper resolution of this kind of dispute (para. 31).”

Kwan JA’s approach as to adopting the TL v ML procedure was approved by the Court of Final Appeal. However, neither TL v ML nor LWYA v KYW is authority for the proposition that this is a compulsory procedure to follow in all cases. It spells out the discipline to be adopted and does not prescribe that this procedure MUST be followed whenever a party says that a third party has property in his/her name that belongs to one of the parties or one of them says that he/she holds property that is held for someone else. Frequently, one spouse will say that that money in a bank account is held on behalf of a relation. It would be absurd if that would automatically trigger the TL v ML procedure irrespective of the sum involved. Likewise, if the equity in a landed property is very small, to engage this procedure would be ludicrous. It is only when it is necessary for the issue to be determined so that “a meaningful FDR” can take place that it should be invoked.

Shortly after TL v ML, Mostyn J. clarified that this TL v ML procedure is not mandatory for all cases requiring a resolution of the third parties’ interest. In Fisher Meredith v JH and PH (Financial Remedy: Appeal: Wasted costs) [2012] EWHC 408 (Fam), Mostyn J. has the following to say,

“41. It is fair to say that while this discipline [the TL v ML prescription] is, generally speaking, the right way of proceeding, it is by no means a mandatory prescription. Thus, in A v A [2007] 2 FLR 467 Munby J, as he then was, stated at para 23, when speaking of TL v ML:

“[23] The deputy judge recorded, at para [35], the complaint of counsel in that case that the issues had never been ‘properly defined, pleaded or particularised’ and went on to suggest, at para [36], how such issues should in future be handled by way of appropriate case management. I am sympathetic to the approach being suggested by the deputy judge, though I would not wish to be quite so prescriptive as he appears to be. Vigorous judicial case management in such cases is vital, but the appropriate directions to be given in any particular case must reflect the case managing judge’s appraisal of how, given the forensic realities of the particular case, the issues can best be resolved in the most just, effective and expeditious manner.”

42. In my judgment there is a clear distinction to be drawn between the state of affairs where a claimant is saying that a property held in the name of a third party is the property of the respondent; and the situation (as here) where the respondent says that property to which he has legal title is beneficially owned by a third party.

43. In the former case I strongly endorse my discipline. In such a case there is a clear obligation on the claimant to apply to join the third party at an early stage and to seek to invoke the discipline in TL v ML. Only in this way can the pool of assets over which the dispositive powers of the court ranges be established and an effective FDR take place.

44. In the latter situation, which is the case here, the duties are by no means so clear cut. If an asset is (say) in the name of the respondent husband then in my judgment the starting point, or prima facie position, is that it belongs to him both legally and beneficially.”

Mostyn J identified two categories of cases in Fisher Meredith. Category 1 which include cases where the legal title to property in dispute is held in the name of a third party and one spouse asserts that the other spouse beneficially owns it. Then, in these cases the obligation was on that spouse to join the third party at an early stage and seek to invoke the discipline in TL v ML. There is a Category 2 type of cases and they are: if the other spouse holds the legal title to the property that he or she claims is held by them on behalf of others. In this second type of cases the duties are by no means clear cut.

It is apparent from Fisher Meredith, that the TL v ML prescription is not a mandatory procedure for all cases involving third interests. Mostyn J agrees with Munby J (as he then was) that it is “not quite so prescriptive” and judges should exercise case management in every case to ensure issues can be resolved in the most just, effective and expeditious manner.

Realistically, there can be a third category added to the categories identified by Mostyn J. There are cases where the value of the interests in dispute is small, such as HK$300,000 is at stake in a relative’s bank account, or the total amount in the family pot does not worth spending the amount of legal costs to go through the suggested discipline. Preliminary hearing is for clarification when necessary – it was clearly not designed for every case when the assets were small and the cost of adjudicating the issue could exceed the value of the subject matter.

Having said the above, it should be noted that in Shields v Shields [2014] EWHC 23 (Fam), after giving judgment on the determination of the third-party interest, DHCJ Nicholas Francis QC said,

“108. I note that there was no FDR in relation to the preliminary issue. Whilst, as been made clear in a number of cases, an FDR will not necessarily be appropriate to the resolution of a preliminary issue, I express the view that consideration should at least be given to the possibility of an FDR prior to the hearing of a preliminary issue. It may well have been the case here that the input of an experienced FDR judge might have helped to save this family from the course which it has taken.”

Case Management

Munby J (as he then was) emphasises that individual case management is vital. There is a duty to ensure the most effective procedure to enable the issues to be determined efficiently and economically. There are several points to be made:

i. Inherent jurisdiction and the CJR

Courts have always had the inherent jurisdiction to regulate their practice and procedure. That inherent jurisdiction is specifically referred to in the Rules of the High Court. O.1B lists some of the case management powers of the judge.

(a) encouraging the parties to co-operate with each other in the conduct of the proceedings;

(b) identifying the issues at an early stage;

(c) deciding promptly which issues need full investigation and trial and accordingly disposing summarily of the others;

(d) deciding the order in which the issues are to be resolved;

(e) encouraging the parties to use an alternative dispute resolution procedure if the Court considers that appropriate, and facilitating the use of such a procedure;

(f) helping the parties to settle the whole or part of the case;

(g) fixing timetables or otherwise controlling the progress of the case;

(h) considering whether the likely benefits of taking a particular step justify the cost of taking it;

(i) dealing with as many aspects of the case as practicable on the same occasion;

(j) dealing with the case without the parties needing to attend at court;

(k) making use of technology; and

(l) giving directions to ensure that the trial of a case proceeds quickly and efficiently.

(See: O.1A r.4)

ii. It is quite clear that whether there should be a separate Preliminary Issue hearing is firmly within the case management function of the judge in each case.

iii. It needs emphasising that the whole point of the CJR was that the Court should exercise its case management function in the interest of proportionality and saving costs. Making it a requirement that this Preliminary Issue procedure is followed in all cases irrespective of cost and delay and irrespective of the value of the assets is the antithesis of what was intended.

iv. The purpose of the FDR is to facilitate settlement. The purpose of the Preliminary Issue is to facilitate settlement at the FDR by ensuring that everyone knows what is within the dispositive powers of the court.

v. Obviously, if the asset about which there is an ownership issue is,

(a) Insubstantial in proportion to the time and costs involved in establishing ownership the cost of the enquiry as to ownership may be quite disproportionate.

Example

Ownership dispute about a landed property where the value of the property may be substantial but there is little equity. Costs of determining this issue will be totally disproportionate to potential value to the matrimonial assets.

(b)There are cases where the disputed asset is valuable but there are other more substantial assets and there is more than sufficient to cater for the needs of both parties. In such a case it may be worthwhile having an FDR before determining the question of ownership with the intervening party or intervening parties joining in the FDR.

The TL v ML prescription is there to ensure a meaningful FDR can take place, the avoidance of witnesses to attend the whole trial to save costs and the need to have a proper framing of the issues i.e., the need to approach the issue on the legal basis as if it were being determined in the Chancery Division. TL v ML was a big money case and the entreaty that the prescription proposed was one which “should ordinarily happen” was not meant to elevate it to the only approach in every ownership dispute.

In LWYA v. KYW it was not mandated that the TL v ML prescription is the only approach to deal with dispute on third parties’ interest. Like TL v ML in LWYA v KYW, the issues involved were complicated and the value of the property involved in the preliminary issue was high so it was entirely sensible to adopt the procedure. However, it is also worth noting that in that case the Wife petitioned for divorce in October 2011 and the Court of Final Appeal decision on the preliminary issue was by judgment dated 22 December 2015 so more than 4 years went by before a meaningful FDR could take place. It is unrealistic to adopt the TL v ML prescription in cases where the amount at stake does not justify legal costs to be spent for a separate preliminary trial; the court’s time; the delay before the FDR; the delay before the final ancillary relief determination if the amount in issue is insignificant in proportion to the totality of the family assets or, in proportion to the costs involved in the determination of the preliminary issue.

Against the background of the underlying objectives of CJR in saving costs and efficiency, the first question should be as to whether there should be a TL v ML Preliminary Issue hearing. If the value of the assets does not warrant a separate hearing judges may exercise their case management function and consider modified procedure such as the following:

  1. A third party in the ownership disputes should be given an opportunity to be joined as a party to the proceedings. Hence, Form F (as prescribed in PD 15.11) to be filed and served. If the third party does not wish to be joined as a party to the proceedings, an opportunity should be given to the third party to file their evidence by way of affidavit/affirmation or witness statements setting out their claim or defence, as the case may be. Failure to receive any evidence from the third party, determination will be made in their absence;
  2. All parties to file their respective affidavits in support of their case and at a Directions Hearing the Court gives directions as to whether or not the issues are sufficiently apparent for the evidence filed so that they may be sufficiently defined by a List of Issues or whether the parties should plead their case by points of claim, defence etc.
  3. All parties should proceed to FDR and on failure to reach any settlement in the FDR, a trial to be fixed for the determination of the third-party ownership disputes within the ancillary relief proceedings.

This hybrid TL v ML procedure allows for the fact that the judge “cannot make an order for the transfer to the wife of someone else’s interest” [per Denning MR] but is a cost proportionate way of dealing with the issues.

Conclusion

There is a very real danger that by seeking ultimate fairness the Courts make that laudable aim impossible by procedures designed for big money cases being adopted across the board. The assets have been spent, or a sufficient proportion of them, to mean the final decision is “unfair” to everyone. In Jones v Jones [2011] EWCA Civ 41, the President of the Family Division, Wall P remarked when dealing with one of those big money cases at [69]:

“… it seems to me unfortunate that our law of ancillary relief should be largely dictated by cases which bear no resemblance to the ordinary lives of most divorcing couples and to the average case heard, day in and day out, by district judges up and down the country.”

We need practical guidance to avoid the straitjacket of an expensive and long delay procedure for cases of small to medium size assets. 

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